General information, not tax adviceThis page summarises ATO guidance. It doesn’t work out anyone’s tax. The ATO’s page on business structures is the place to check, and a registered tax agent can advise on your own partnership.
Two sides of the same joint
Like a half lap, where each board gives up half its thickness so the two sit flush, the tax work is split between the partnership and the partners. Here is who carries what.
The partnership
- Has its own tax file number, and must apply for an ABN and use it for all business activities.
- Must register for GST if its annual GST turnover is $75,000 or more ($150,000 for not-for-profit organisations), as at October 2026 on the ATO’s page.
- Lodges an annual partnership return showing all business income and deductions, and how the income or loss is distributed to the partners.
- Does not pay income tax.
- Must pay super for its employees.
Each partner
- Reports their part of the net partnership income or loss in their own return, and is personally liable for any tax due on it.
- Is not an employee of the partnership.
- Is responsible for their own super. Partners don’t have to pay the super guarantee for themselves, but can choose to make personal contributions.
- Can’t claim a deduction for money they take out. Drawings are not wages for tax purposes.
The return, and when it’s due
The ATO says the 2026 partnership return and its schedules are due by 31 October 2026, unless the ATO allows a later date or a registered tax agent prepares the return and a later due date applies. It can be lodged through standard business reporting (SBR) enabled software, through a registered tax agent, or on paper.
The return includes a statement of distribution for each partner, showing what is distributed to that partner.
Owning something together isn’t always a partnership return
The ATO says no partnership return is needed where there was no partnership carrying on a business, or where the only income earned jointly with another person was rent from an investment property owned together, interest from a joint account or dividends from shares held jointly. In those cases each person shows their share in their own return.
Why a partner’s “salary” is a share of profit
The ATO’s return instructions put it plainly: a partner can’t be an employee of a partnership, partners’ salaries can’t be claimed as a deduction, and they can’t create or increase a partnership loss. They are “an allocation or advancement of profits before general distribution”. The detail is in Taxation Ruling TR 2005/7. Two points from it shape the example below:
- The salary is added back to work out the partnership’s net income. It then forms part of the salaried partner’s interest in that net income, to the extent net income is available.
- If the salary drawn is more than that partner’s interest in the available net income, the excess is not assessable that year. It is an advance of future profits, assessable in a later year when enough profit is available.
A 60/40 partnership with a $30,000 partnership salary
An invented partnership, set out the way TR 2005/7’s own examples are. Partner A runs the workshop and Partner B looks after the books. Before the income year starts, they agree in writing that A draws a partnership salary of $30,000, and that what remains is shared 60% to A and 40% to B, losses included. The figures are made up to show the method; they are not tax rates or anyone’s results.
| Year | Profit after A’s salary | Net income (salary added back) | Partner A | Partner B |
|---|---|---|---|---|
| Year 1 | $70,000 | $100,000 | $72,000 | $28,000 |
| Year 2 | −$10,000 | $20,000 | $20,000 | $0 |
| Year 3 | −$40,000 | −$10,000 | −$6,000 | −$4,000 |
Year 1. Net income is $70,000 + $30,000 = $100,000. A’s interest is the $30,000 salary plus 60% of the remaining $70,000 ($42,000), so $72,000. B’s interest is 40% of $70,000, so $28,000. Together: $100,000.
Year 2. Net income is only $20,000, less than the salary. A’s interest is the whole $20,000 and B’s is nil. The other $10,000 A drew is, on the ruling’s approach, an advance of future profits: not assessable this year, assessable in a later year when enough profit is available.
Year 3. Adding the salary back gives a net loss of $10,000. Because the salary can’t create or increase a loss, the $10,000 loss is shared 60/40 under the agreement: A −$6,000, B −$4,000. All $30,000 A drew is an advance of future profits. The ruling’s examples add that if the partnership is wound up before those profits arrive, the excess is repayable by the partner.
For comparison, Year 1 with other agreements. With no salary clause and a plain 60/40 split, A’s interest would be $60,000 and B’s $40,000. With no written agreement at all, the ATO says income is shared equally: $50,000 each.
What to take from it
Each partner is taxed on their interest in the partnership’s net income, worked out under the agreement for that year. In the ruling’s examples, a partner’s drawings don’t affect their tax except in working out that interest. That is why the partnership agreement and the tax return are two faces of one joint, and why the ATO suggests asking it or a recognised tax adviser where its instructions don’t fully cover your circumstances.