Child as Partner: A Minor as a Partner — How Is It Taxed?

Introduction

Can a minor child be a partner in a family partnership? And if so, how is the income from the child's share taxed?

This article explains the position of a minor as a partner and a child's income under the Income Tax Act 1967 (ITA 1967): is it assessed in the child's own name, through the parent/guardian (section 69), or treated as belonging to the contributor/parent (section 65)? It also touches on Form P and CP30 procedures and eligibility for child relief.

Partnerships under ITA 1967 — basics

In a business partnership, a partnership is not a taxable entity: divisible income is distributed according to the basis of division and each partner is assessed on their own statutory income share (Part 3, s.55 ITA 1967).

From the divisible income, remuneration, capital interest and personal expenses charged to a partner (in the partnership accounts) are deducted first before distribution (s.55(3)).

Source: ITA 1967, s.55 (R1); HASiL — Introduction to Individual Income Tax (R2).

"Child" and "minor" — s.2 and s.69

The definition of "incapacitated person" in s.2 ITA 1967 includes a minor. Section 69 sets out who is assessed on behalf of a minor:

• s.69(1) — a person lawfully administering a minor's property and receiving the minor's gross income is assessed on behalf of the minor;
• s.69(3) — the parent/guardian is assessed on behalf of the minor;
• s.69(4) — a minor is not prevented from being assessed directly.

Source: ITA 1967, s.2 & s.69 (R1).

Section 65 — settlements and income of unmarried children under 21

Under s.65 ITA 1967, income or assets from a settlement that is or may become payable to an unmarried relative under 21 is treated as the income of the settlor under s.65(1).

Source: ITA 1967, s.65 (R1).

Procedure — Form P, CP30 and e-Daftar

• Form P (e-P) is submitted by the principal partner; Form CP30 is issued to each partner to report their respective income share.
• Partner details — identity card/passport number, share, basis of division, entry/exit dates — are recorded in Part G/H of Form P.
• Partnership e-Daftar asks for partner details: identity card/passport number, percentage, basis of division and address.
• Any change of partners / termination / change of business type (e.g. to a sole proprietorship or company) must be notified in writing to HASiL.

Source: HASiL — Tax Responsibilities for Individuals (Business) (R3); Form P Explanatory Notes (R4); Partnership e-Daftar (R5).

Relationship with child relief (s.48)

Child relief (s.48 ITA 1967) and rebate are only mentioned here as a warning: do not assume that a child's income (e.g. a partnership share) does not affect child relief eligibility. The effect on child relief eligibility when a child has their own income has not been confirmed — see the this item still awaits official confirmation from HASiL — check again with HASiL before deciding. note below.

this item still awaits official confirmation from HASiL — check again with HASiL before deciding. notes from research

Frequently Asked Questions (FAQ)

Q. Can a minor be a partner in a family partnership? A. The general legal position on a minor's contractual capacity (Contracts Act 1950) is outside the scope of tax sources — this item still awaits official confirmation from HASiL — check again with HASiL before deciding. For tax purposes, the ITA 1967 provides assessment mechanisms on behalf of a minor (s.69) and settlement treatment (s.65). Verify the general legal position with appropriate sources before acting.

Q. How is income from a child's partnership share taxed? A. A partnership is not a taxable entity; each partner is assessed on their own statutory income share (s.55). For a minor, s.69 provides for assessment on behalf of the minor by the person lawfully administering the property / parent / guardian, or the minor may be assessed directly (s.69(4)). Income from a settlement to an unmarried relative under 21 is treated as the settlor's income (s.65).

Q. Who needs to file Form P? A. Form P (e-P) is submitted by the principal partner; CP30 is issued to each partner. Changes of partners must be notified in writing to HASiL.

Q. Is a child with a partnership share still eligible for child relief? A. The effect on child relief eligibility (s.48) when a child has their own income has not been confirmed — this item still awaits official confirmation from HASiL — check again with HASiL before deciding. Do not claim without a source.

Glossary

• Principal partner — the partner responsible for submitting Form P.
• CP30 — the form issued by HASiL to each partner to report their income share.
• Divisible income — a partnership's divisible income distributed according to the basis of division.
• Incapacitated person — the s.2 ITA 1967 definition that includes minors.
• Minor — a child under age (under 18).
• Settlement — an arrangement of property; income/assets from it to an unmarried relative under 21 is treated as the settlor's income under s.65.
• YA — Year of Assessment.