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En Commandite Partnership
- 11 April 2024
- Accounting
- The Tax Faculty Tax Specialist
This article is based on tax law for the year ending 29 February 2024.
1. Background
Partner 1 is designated as a disclosed 1% partner, while Partner 2 assumes a 99% partnership share.
2. The Problem / Facts
What are the tax implications of this en commandite partnership arrangement?
3. Applicable Law
Income Tax Act 28 of 192, Section 24H
4. Application of the Law to the Facts
An en commandite partnership is also known as a limited partnership, that offers a unique structure where one partner actively participates while another remains silent. The limited partner has limited exposure to the liabilities of the partnership. Regardless of being a limited partner, for tax purposes, each partner is treated as if they are directly engaged in the business activities of the partnership. This means all partners are subject to tax obligations as individual business operators, despite their limited liability status.
The total deductions or allowances a limited partner can claim against their tax obligations cannot exceed their financial commitment or liability towards the partnership's debts. This includes both their initial investment and any potential income from the partnership. If a limited partner's deductions are disallowed in a given tax year, these can be carried forward to the next year. This provision ensures that partners can eventually benefit from deductions, even if not immediately.
Income received by the partnership is distributed among the partners according to a pre-agreed ratio. For tax purposes, this income is treated as having been individually received by each partner on the same date it was earned by the partnership. Similarly, any tax deductions or allowances are divided among the partners in line with their profit-sharing agreement.
5. Conclusion
In essence, while limited partners enjoy protection from full liability, they are still actively considered participants in the partnership for tax purposes. Their ability to claim deductions is directly tied to their investment and income from the partnership, ensuring a fair balance between their limited liability and tax obligations.