A “mixed partnership” is a partnership or Limited Liability Partnership (LLP) that includes at least one non-individual. An excess profits allocation rule applies if a mixed partnership makes a taxable profit and either of the following conditions apply:

  • Condition X: the profits represent deferred profit of an individual member (A), or
  • Condition Y: an individual partner A meets the power to enjoy condition, in relation to any element of the profit share allocated to the non-individual partner, and
  • As a result, an individual member’s profit share and their relevant tax amount are lower than they would have been, had the profits been allocated to him or her, rather than the non-individual.
  • In respect of Conditions X and Y it must be “reasonable to assume” that:
    • A’s profit share is less than it would be in the absence of the profit deferral arrangements or the circumstances that lead to the power to enjoy condition being met, and
    • Less tax is paid as a result of the allocation of profits to the non-individual.

The intention of the legislation is to tax the individual:

  • On the profit shares that would have been allocated to him or her had the profit deferral arrangements not existed, or
  • That reflects a taxpayer’s power to enjoy the profits.

For non-deferred profit arrangements, the additional taxable profit is the non-individual’s “excess profit”, which is the appropriate notional profit of the non-individual less the profit allocated to that non-individual under the arrangement.

When the legislation applies

Condition X applies if an individual member’s deferred profits are included in the non-individual member’s profit share, and

Condition Y applies if:

  • A profit share is more than its appropriate notional profit
  • The individual member has the power to enjoy the profit share allocated to the non-individual member, and
  • It is reasonable to assume that the non-individual member’s profit share is (in part or in full) attributable to the individual’s power to enjoy it.

“Non-individual partner”

A non-individual partner is a partner of a general partnership or LLP that is anything, which is not a natural person and therefore includes:

  • Companies
  • Partnerships
  • LLPs, and
  • Individuals acting as trustees.

The term does not include an alternative investment fund manager, if that fund manager has elected to be treated as a partner itself.

“Appropriate notional profit”

This term has two aspects:

  1. The appropriate notional return on capital, which is the commercial rate of interest on the capital contributed; and, as such, is not a set rate, but merely reflects the level of risk involved, and
  2. The appropriate notional consideration for services, which is the arm’s length value of the services provided, less any amount received by the relevant individual for those services.