A partnership offers simplicity, flexibility, and shared control — yet it also exposes partners to unlimited personal liability. Understanding how partnerships work from both a legal and tax perspective is critical before committing to one.
In an era of tech-driven entrepreneurship and complex corporate structures, the traditional partnership remains one of Australia’s most enduring business models.
According to the Australian Bureau of Statistics (ABS 2025), around 17% of Australian small businesses operate under a partnership — most commonly in professional services, agriculture, and medical practices.
Related reading: Sole Trader Structure in Australia — Pros, Cons, and Tax Implications
A partnership is an association of two or more persons or entities carrying on business in common with a view to profit, under the Partnership Act in each Australian state and territory.
Importantly, a partnership is not a separate legal entity — the partners are the business. Each partner can legally bind the others and is jointly and severally liable for all partnership debts.
The Income Tax Assessment Act 1997 (s.995-1) extends this definition for tax purposes to include individuals or entities that are merely in receipt of income jointly (for example, co-owners of rental property).
Key takeaway: A partnership can exist even without a formal registration — but the absence of a written partnership agreement increases your legal and tax risk.
Under sections 90–94 of the ITAA 1936, a partnership must lodge an annual income tax return, though it does not pay tax itself. Each partner is assessed individually on their share of the net partnership income.
If a partnership earns $200,000 and has two equal partners, each declares $100,000 in their personal return.
Non-commercial loss rules apply at the individual partner level.
Superannuation: Partners are not employees and must manage their own super contributions.
Capital gains tax (CGT): Partners are treated as owning a fractional interest in each asset. CGT events occur at the partner level, not the partnership.
Small Business CGT Concessions: Available individually if the partner meets the $6 million net asset or $2 million turnover tests (ITAA 1997 s.152-10).
| Advantage | Why It Matters |
|---|---|
| ✅ Simple and low-cost setup | No ASIC registration; only an ABN required |
| ✅ Flexible income sharing | Profits can be split between partners (subject to PSI and Part IVA) |
| ✅ Access to CGT concessions | Each partner can claim small business CGT relief |
| ✅ No FBT on partners’ benefits | Reduces compliance cost |
| ✅ Common for professionals | Suited to accountants, doctors, and lawyers operating jointly |
| Disadvantage | Risk Level |
|---|---|
| ❌ Unlimited personal liability | High – partners are personally liable for all debts |
| ❌ Succession complexity | Business dissolves on partner exit (unless large partnership) |
| ❌ Tax inefficiency at higher incomes | Profits taxed at personal marginal rates |
| ❌ No asset protection | Partners’ personal assets exposed |
| ❌ CGT implications on changes | Partner exits trigger deemed acquisitions/disposals |
Tip: Many modern firms reduce exposure by having companies or trusts as partners, providing a layer of limited liability.
A well-drafted partnership agreement is your legal backbone.
According to Taxation Ruling TR 94/8, the ATO considers several factors when assessing whether a true partnership exists — including joint accounts, shared profits, and business registration.
A comprehensive partnership agreement should include:
Commencement date and partner identities
Profit-sharing ratios and capital contributions
Entry/exit terms
Dispute resolution procedures
Succession and valuation methods
CGT, superannuation and liability clauses
Warning: Without a formal agreement, the ATO may treat the income as belonging to a single individual — defeating any intended income-splitting benefits.
| Feature | Partnership | Sole Trader | Company |
|---|---|---|---|
| Legal Entity | No | No | Yes |
| Taxed At | Individual level | Individual level | Flat 25–30% |
| Liability | Joint & several | Unlimited | Limited |
| Setup Cost | Low | Very Low | Moderate |
| Best For | Professionals, family ventures | Freelancers | Growth-stage SMEs |
(Internal link: Sole Trader Structure in Australia — Pros, Cons, and Tax Implications)
You might choose a partnership if:
You’re starting a professional practice (medical, legal, consulting).
You and your partner want shared management and flexible income allocation.
You plan to scale later into a company or trust structure.
You should avoid a partnership if:
You need limited liability or asset protection.
You expect frequent partner changes.
You require external investors or funding.
If three partners sell a jointly owned business premises for $3 million:
Each partner is treated as selling a one-third interest.
Each calculates their capital gain individually.
CGT small business concessions apply separately.
A partnership offers agility and shared ownership — but it’s not without exposure.
It’s best suited for small teams with mutual trust and aligned goals, who can handle shared liability.
At 42 Advisory, we help business owners choose, structure, and transition between entities as they grow — ensuring compliance, tax efficiency, and long-term protection.