Reasonable benefit limits: highest average salary and partnership losses prior to 1 July 1990 for transitional reasonable benefit limits.

Are partnership losses incurred prior to 1 July 1990 deducted from a person's highest average salary (HAS) for transitional reasonable benefit limit (RBL) purposes?

No.

The applicant was a partner in a partnership, which had net business losses for a financial year commencing prior to 1 July 1990.

The applicant applied for a transitional RBL and requested that the Commissioner determine arm's length salaries for the years 1987 - 1988, 1988 -1989 and 1989 -1990.

Arm's length salaries were determined by the Commissioner for the years requested and a highest average salary (HAS) was calculated using those arm's length salaries.

A person's HAS is defined in subregulation 47(1) of the Income Tax Regulations 1936 (ITR 1936). 'Salary' is also defined in that subregulation.

Paragraph 47(3)(b) states that for the purposes of the definition of 'salary' in subregulation (1): 'if a person carries on a business (either alone or in partnership with another person): (i) the person's salary is to be increased by the person's share of the net business income, or (ii) the person's salary is to be decreased by the person's share of the net business losses;'.

In subregulation 47(1) of the ITR 1936 'net business losses' in relation to a business only applies to years commencing on 1 July 1990 or a later financial year.

In this instance, the taxpayer's share of net business losses from this partnership is in relation to a financial year commencing prior to 1 July 1990. Consequently, this amount is not considered to be 'net business losses' as defined in subregulation 47(1).

Therefore, the applicant's salary for the purposes of calculating his HAS is not decreased by the partnership losses incurred by the taxpayer prior to 1 July 1990.