In terms of South African law natural persons (individuals) and legal persons all enjoy legal personality: in other words, both groups represent “persons” capable of e.g. legally acting on their own behalf, own property and to earn income. Consequently, they are also capable of being taxed.Where legal persons are concerned, legal personality is typically attributed to companies and close corporations. The position of trusts (as a hybrid-type entity) is somewhat more complicated. What is clear though is that a “partnership” is not a legal person or entity.[1] A partnership represents merely a contractual arrangement entered into by two or more persons to pool their respective resources in striving to achieve some common (typically commercial) goal.
Section 1 of the Income Tax Act, 58 of 1962 defines a “person” as including:
(a) an insolvent estate;
(b) the estate of a deceased person;
(c) any trust; and
(d) any portfolio of a collective investment scheme.
It is notable that neither natural persons nor companies are specifically included in the above list, yet a moment’s reflection shows that it would be unnecessary to be so included by virtue thereof that the law already ordains these persons with legal personality. On a similar basis, by not including a “partnership” in the above list, the common law position serves as the prevailing position, being that the partnership is not a person for purposes of law. It follows that a partnership is not a “taxpayer” for purposes of the Income Tax Act.
Juxtaposed to this is the position in the VAT Act, 89 of 1991, where an unincorporated body of persons, or a partnership, is specifically included in the definition of “person” in section 1. Sometimes confusingly so therefore, whereas a partnership is not a legal person nor a “person” for income tax purposes, it is treated as a separate VAT vendor, and taxed accordingly on VAT account.
As for income tax purposes though, the position of the partnership remains simply that each partner’s profits and losses arising from the partnership are attributed to each separately, and consequently taxed separately too in each partner’s hands as and when accruing to that partner.
The Income Tax Act is almost surprisingly quiet on the tax treatment of general partnerships, with but limited provisions contained in section 24H(2) and (5) thereof. These provisions in essence dictate that:
- the partners of a partnership are individually each deemed to be carrying on the trade of the partnership collectively; and
- the income of the partnership accrues to the partners each as and when it will have accrued to the partnership (and that qualifying deductions otherwise available to taxpayers may be claimed by the partners each against such income accruing and at such time).
[1]Michalow, NO v Premier Milling Co Ltd 1960 (2) SA 59 (W)
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. (E&OE)