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# Australia Partnerships -- Division 5 Flow-Through Taxation Skill v1.1

## Australia Partnerships -- Division 5 Flow-Through Taxation Skill v1.1

> **General reference only.** This skill is general tax/accounting reference material for AI-assisted workflows. It has not been reviewed for any specific person's facts, documents, elections, deadlines, residency, filing status, or local procedures. Do not rely on it to file, pay, amend, or take a tax position without review by a qualified professional in the relevant jurisdiction.

> **Law-change context.** Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (Royal Assent 26 June 2026) is LAW: from 1 July 2027 the 50% CGT discount for individuals, trusts and partnerships is replaced by cost base indexation plus a 30% minimum rate on capital gains accruing after that date -- partners' fractional-interest gains (Rule 7) are computed under current rules for 2025-26 and 2026-27 only. The permanent $20,000 instant asset write-off was enacted on 26 August 2026. Schedule 2 commences on 1 October 2026 and applies to eligible assets first used or installed ready for taxable use on or after 1 July 2026. Eligible small business entities must use simplified depreciation and the asset must cost less than $20,000. See [Tax Reform No. 2 Act 2026, section 2 and schedules 1-2](https://www.legislation.gov.au/C2026A00071/asmade/text).

## Section 1 -- Quick reference

**Read this whole section before computing or classifying anything.**

**Quick reference table**

| Field | Value |
| --- | --- |
| Country | Australia |
| Primary Legislation | ITAA 1936 Part III Division 5 (ss 90-94); s 995-1 ITAA 1997 (definition); s 106-5 ITAA 1997 (CGT); Div 35 ITAA 1997 (non-commercial losses) |
| Tax Authority | Australian Taxation Office (ATO) |
| Income Year | 2026-27 (1 July 2026 -- 30 June 2027); lodgment season for 2025-26 |
| Entity taxation | NONE -- the partnership lodges a return (form P, NAT 0659) but pays no income tax; s 92 flows net income/losses to partners |
| Sharing absent agreement | Equal shares (state Partnership Acts default) |
| Partner "salary" | NOT deductible -- a distribution of profit (TR 2005/7); cannot create or increase a partnership loss |
| Partnership losses | Flow through to partners in the loss year (contrast trusts) -- individuals then gated by Div 35 non-commercial loss rules |
| Div 35 gates | Income requirement < $250,000; then one of: assessable income >= $20,000, profits 3 of 5 years, real property >= $500,000, other assets >= $100,000, or Commissioner's discretion |
| CGT | No partnership-level CGT -- each partner holds a fractional interest in EACH CGT asset (s 106-5) |
| GST | Registers at PARTNERSHIP level; $75,000 registration turnover threshold (GSTR 2003/13) |
| PAYG instalments | Entered and paid by each PARTNER on their instalment-income share, not by the partnership |
| Return due dates | Self-lodged: 31 October; registered agent: per lodgment program (commonly 15 May) |
| Professional firm profits | PCG 2021/4 gateways + risk zones (green <= 7 / amber 8 / red >= 9 on factors 1-2; <= 10 / 11-12 / >= 13 on all three) |
| Contributor | Open Accountants |

**Conservative defaults:**

**Conservative defaults table**

| Ambiguity | Default |
| --- | --- |
| No written partnership agreement sighted | Assume EQUAL income and loss sharing; flag that salary/interest allocations are unproven |
| Salary or profit-variation agreement undated | Assume made AFTER year end -- ineffective for that year (*Galland*); shares revert to the deed/default |
| Jointly owned rental property, no business | Tax-law partnership by joint receipt only -- split per LEGAL ownership interests (TR 93/32; *McDonald*), agreements ignored; no partnership return required |
| Family partnership genuineness unknown | Test against TR 94/8 factors and run the PSI screen (au-psi) before accepting the split |
| Income vs capital sharing ratios differ | Verify both ratios against the deed; document -- CGT follows asset fractions, s 92 follows income interests |
| Partner joined/left during the year | Assume reconstitution conditions NOT satisfied until evidenced -- two returns and new TFN/ABN exposure (Rule 8) |
| Div 35 test evidence missing | Assume the loss is DEFERRED for individual partners; flag |
| Corporate or trust partner present | Exclude their share from the whole-partnership $20,000 / $500,000 / $100,000 tests; company tax and Div 7A screens apply to the corporate partner |
| Everett assignment mentioned | Treat as unassessed high-risk until PCG 2021/4 gateways are cleared -- escalate (R-AU-PT-1) |

## Section 2 -- Required inputs and refusal catalogue

### Required inputs

**Minimum viable** -- partnership agreement (or confirmation none exists), prior form P return, current-year trial balance/financials, each partner's identity, type (individual/company/trust) and residency, income and capital sharing ratios.

**Recommended** -- partners' capital and drawings ledgers, any salary/interest clauses with the DATE they were agreed, asset register with acquisition dates and cost bases per asset, GST registration status, each individual partner's other taxable income (for Div 35), PCG 2021/4 self-assessment where professional services.

**Ideal** -- deeds of admission/retirement with dates, reconstitution notification evidence (28-day letter to the ATO), work-in-progress and trading stock values at change dates, family-group and associate map, Everett assignment deeds if any exist.

### Refusal catalogue

- **R-AU-PT-1 -- Everett assignments** — *Trigger:* executing, valuing, or defending an assignment of a partnership interest to a spouse, trust or other entity; anything failing the PCG 2021/4 gateways. *Message:* "Everett assignments involve equitable assignment of a chose in action, CGT on the assignment, PCG 2021/4 gateway and risk-zone analysis, Part IVA exposure, and (since 8 May 2018) restricted small business CGT concessions. Out of scope -- escalate to a qualified practitioner. This skill only flags and risk-scores existing arrangements (Rule 12)."  _(PCG 2021/4; Rule 12)_
- **R-AU-PT-2 -- Corporate limited partnerships (Div 5A)** — *Trigger:* limited partnership, incorporated limited partnership, or any partnership taxed as a company under ss 94A-94X. *Message:* "Corporate limited partnerships are taxed as companies (Division 5A; s 94K switches off Division 5) -- distributions are deemed dividends. Out of scope. Escalate."  _(Division 5A; ss 94A-94X; s 94K ITAA 1936)_
- **R-AU-PT-3 -- Foreign hybrids and foreign partners** — *Trigger:* foreign hybrid limited partnership (Div 830 ITAA 1997), non-resident partners, or foreign-source partnership income with treaty questions. *Message:* "Foreign hybrid classification, s 92(1)(b) source apportionment and treaty relief are out of scope. Escalate before lodgment."  _(Div 830 ITAA 1997; s 92(1)(b))_
- **R-AU-PT-4 -- VCLPs and ESVCLPs** — *Trigger:* venture capital limited partnership, early stage venture capital limited partnership, AFOF or VCMP structures. *Message:* "Venture capital vehicles have their own registration, flow-through and exemption regimes (Subdiv 118-F ITAA 1997; Venture Capital Act 2002). Out of scope. Escalate."  _(Subdiv 118-F ITAA 1997; Venture Capital Act 2002)_
- **R-AU-PT-5 -- Partnership rollovers and restructures** — *Trigger:* incorporating a partnership (Subdiv 122-B), small business restructure rollover (Subdiv 328-G), s 70-100 trading stock elections on a change of ownership, or merging firms. *Message:* "Rollover eligibility, election deadlines and asset-by-asset consequences are out of scope. Compute nothing -- escalate."  _(Subdiv 122-B; Subdiv 328-G; s 70-100)_
- **R-AU-PT-6 -- s 94 uncontrolled partnership income** — *Trigger:* a partner who lacks real and effective control and disposal of their share (sleeping partners, minors as partners, contrived interposed interests). *Message:* "Section 94 ITAA 1936 imposes further tax at penalty rates on uncontrolled partnership income. Identification and computation are out of scope -- document the control facts and escalate."  _(Section 94 ITAA 1936)_

## Section 3 -- GL sweep library

Partnership work starts with the P&L and the capital accounts, not the profit split the client recites.

**GL sweep library table**

| GL pattern | Likely issue | Action |
| --- | --- | --- |
| "Partner salary" / partner names in wages expense; drawings coded as salary or consulting expense | Profit distribution mis-coded as a deduction (TR 2005/7); PAYG-W may have been wrongly applied | Add back to s 90 net income; treat as allocation of the partner's s 92 share -- partners are not employees: no PAYG-W, no SG on drawings |
| Superannuation expense for partners | Partners' personal contributions are NOT partnership deductions | Add back; each partner claims their own s 290-150 deduction personally |
| "Interest on capital" credited to partners | Appropriation of profit, not an expense | Add back to net income; it forms part of the recipient's profit share |
| Interest on genuine external borrowings | Deductible if funding the business -- including refinancing partner capital previously invested (*Roberts & Smith*; TR 95/25) | Verify the borrowing's use; refinancing of capital in excess of contributed amounts escalates |
| One partner's drawings persistently fund private assets | Disguised unequal distribution; family-splitting / s 94 optics | Reconcile drawings to profit shares; check the agreement actually supports the split |
| Loan account: partnership lends to a partner | Not Div 7A (no private company lender) -- but check corporate partners | If a corporate PARTNER's money flows to shareholders/associates, run au-div7a on the company |
| Round-sum monthly "management fee" to a related entity | Profit extraction bypassing s 92 shares | Test substance; PCG 2021/4 / Part IVA optics for professional firms |
| Negative partner capital account | Drawings exceed profit shares -- exit CGT and recovery risk | Flag; check partner's basis on any retirement |
| "Partnership distribution" of rental property between spouses at non-title ratios | TR 93/32 breach | Re-split per legal ownership; amend if lodged |

## Section 4 -- Worked examples

### Example 1 -- Equal two-partner split with s 92 inclusion

Ana and Ben run a cafe in equal partnership (no written agreement -- equal sharing by default). 2026-27: accounting profit $86,000 AFTER crediting each partner $2,000 "interest on capital". Both amounts are appropriations of profit, so s 90 net income = $86,000 + $4,000 = **$90,000**. Each partner's s 92(1) share = **$45,000** -- assessable whether or not drawn (Ana drew only $20,000 cash; she is still assessed on $45,000).

Ana has no other income. 2026-27 resident rates: tax = 15% x ($45,000 - $18,201) = 15% x $26,799 = **$4,019.85**, plus Medicare levy 2% x $45,000 = $900, less offsets: the small business income tax offset (turnover < $5m) is 16% x $4,019.85 = $643 (under the $1,000 cap), plus any LITO. The partnership itself pays nothing and remits nothing for the partners.

### Example 2 -- Partner salary recharacterised where it would create a loss

The written agreement (signed before 1 July -- *Galland* timing satisfied) gives Priya a $60,000 "salary" plus 50% of the remainder; Quinn takes the other 50%.

**Case A -- net income $40,000.** The salary is not deductible and cannot create a loss (TR 2005/7 para 7). Priya's s 92 interest = the available net income, capped: **$40,000**. Quinn: **nil**. The $20,000 excess drawn is an advance of future profits -- not assessable now, and brought to account in a later year when sufficient profits exist (TR 2005/7 paras 8-9).

**Case B -- partnership loss $10,000 (before any salary).** The salary agreement merely varies profit shares -- it cannot manufacture or enlarge a loss. The s 90 partnership loss stays **$10,000**, flowing $5,000 to each partner under s 92(2) (equal loss sharing). Priya's $60,000 drawn is simply drawings against her capital account and future profit entitlements.

### Example 3 -- Non-commercial loss deferral for a hobby-farm partner

Sam (salary $185,000) and his spouse run a small olive grove in equal partnership; both are individuals. 2026-27: partnership assessable income $12,000, partnership loss $18,000 -- Sam's s 92(2) share is a $9,000 deduction, IF Div 35 lets him use it.

- Income requirement: Sam's income for Div 35 (taxable income adding back the business loss, plus reportable fringe benefits, reportable super and net investment losses) is about $194,000 < $250,000 -- **met**, so the four tests are available.
- Assessable income test: whole-partnership income $12,000 < $20,000 -- **fail**.
- Profits test: losses every year since planting -- **fail** (needs profits in 3 of the last 5 years including the current year).
- Real property test: grove land worth $380,000 < $500,000 -- **fail**.
- Other assets test: plant and stock $60,000 < $100,000 -- **fail**.
- Commissioner's discretion: no flood/drought special circumstances; olives are past their lead time -- **not sought**.

Result: Sam's $9,000 share is **deferred**, quarantined against future profits of the same activity. The primary production exception cannot save him: it needs other income (excluding net primary production income) under $40,000, and Sam's salary alone is $185,000. His spouse (no other income) meets the income requirement too but fails the same four tests -- also deferred; had she earned nothing else, the $40,000 primary production exception would have let her claim her share immediately. Same partnership, different outcomes per partner.

### Example 4 -- Fractional CGT on admitting a partner

Cate and Dev are equal partners. The partnership's only CGT asset is business premises: cost $400,000 (acquired 2023), market value $600,000. On 1 March 2027 they admit Emil as an equal one-third partner.

There is no partnership-level CGT. Under s 106-5, Cate and Dev each held a 50% fractional interest in the premises; each now disposes of one-sixth of the asset (50% -> 33.33%) to Emil -- CGT event A1 for each of them:

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