Issue
Is a partner in a partnership entitled to the determination of an arm's length salary (ALS)?
Decision
No, a partner is not entitled to the determination of an ALS.
Facts
The applicant applied for the determination of an arm's length salary.
The applicant is solely engaged as a partner in a partnership.
Reasons for Decision
Subregulations 47(3) and (4) of the Income Tax Regulation 1936 (ITR 1936) provide for the determination of an appropriate ALS for a person who is an 'associate' of the person's employer. The Commissioner may approve an ALS after considering relevant factors in accordance with subregulation 47(4) of the ITR 1936.
However, for an ALS to be determined, paragraph 47(3)(c) of the ITR 1936 a person must be an 'associate' of the person's 'employer'.
Section 140C of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to the definition of 'associate' for RBL purposes defines 'associate' to have the same meaning as in section 26AAB of the ITAA 1936.
It was determined in Ellis v Joseph Ellis & Co [1905] 1 KB 324 that a partner cannot be an employee of the partnership as the same person cannot occupy the position of employee and employer. Payment of a 'salary' to a partner is just a distribution of partnership income.
A partner of a partnership cannot be an employee of that partnership. A person who is only engaged as a partner of a partnership is not entitled to the determination of an ALS.