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Income TAX ON Estates Trusts Partnerships Joint Ventures AND CO- Ownership UST
Accountancy (BSA2)
Quezon City University
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INCOME TAX ON ESTATES AND TRUSTS
A. TAXABILITY OF ESTATES
An estate pertains to all the property, rights and obligations of a deceased person, including those that accrue since the opening of succession.
Taxability: An estate is taxable DURING judicial settlement , that is, during the time the estate is the subject of judicial testamentary or intestate proceedings.
Estates are taxed similar to an individual , so the rules on taxable income, those subject to final tax, capital gains tax, the deductions and the rates are similar, EXCEPT :
- An estate is required to obtain its own Tax Identification Number (TIN).
- Distribution of the INCOME to the heirs shall be deductible for purposes of computing taxable income. Such distribution shall be subject to a 15% withholding tax and will be reported by the heir as part of his personal taxable income.
Personal Exemption: of 20,000 provided under Sec. 62 has been repealed under the TRAIN.
Period to start: The estate is taxed only on its income from the death of the decedent. Any income for the year which was earned prior to death is reported separately in the individual’s income tax return for the year.
Not under JUDICIAL settlement: An estate NOT under judicial settlement shall be treated as a co-ownership for tax purposes or if the heirs actively participated in its management or invested additional capital thereto, it may be considered a partnership, taxable as such.
Liability to pay the income tax: the administrator or executor will be liable to pay the income tax liability of the estate.
B. TAXABILITY OF TRUSTS
A trust is the arrangement created by will or an arrangement under which title to property is passed to another for consideration or investment with the income therefrom and ultimately the corpus to be distributed in accordance with the directions of the creator as expressed in the governing instrument.
Parties to a trust include the trustor, the one who establishes the trust; the trustee, the one in whom confidence is reposed as regards the property for the benefit of another person; and the beneficiary, for whose benefit the trust has been established.
Kinds of trust:
- Revocable – one where at any time the power to revest (return) in the grantor title to any art of the corpus of the trust is vested; the trust is not considered a separate taxable entity and the income from the corpus forms part of the taxable income of the grantor.
- Irrevocable – where no such right exists or cannot be exercised after an agreed period; Here, the trust itself is considered a separate taxable entity from the grantor, and is taxed similar to an estate under judicial settlement and similarly entitled to a P20,000 basic personal exemption.
Rules on Taxability:
- If the income is distributed regularly, such will form part of the taxable income of the beneficiary.
- If the trust is revocable, the income of the trust forms part of the taxable income of the trustor.
- Only when the trust is irrevocable and the income is kept in the trust, would there be a need to compute for the income tax liability of the Trust.
- If the Trust is treated as a separate taxable unit, the rules on individuals are the same, except that the Distribution of INCOME to the beneficiary shall be deductible for purposes of computing the taxable income of the Trust subject to 15% withholding tax, and the amount distributed (gross of the withholding tax) will form part of the beneficiary’s taxable income.
Personal Exemption: of 20,000 provided under Sec. 62 has been repealed under the TRAIN.
ILLUSTRATION: G transferred property to F, in trust, and under the terms of the transfer, F should accumulate the income for the benefit of B until the latter reaches the age of majority. During 2016, the property earned P1,000,000 and incurred expenses of P350,000. P50,000 of the income was distributed to B. How much is income tax?
Gross Income P1,000, Less: Deductions for: Expenses 350, Distribution of income to beneficiary 50, Exemption 0 40 0, Taxable Income 60 0, Income Tax P 80,
- In the above illustration, G is known as the Grantor, F is known as the Fiduciary, B is known as the Beneficiary.
- Income distribution to the beneficiary and income set aside or applied for his benefit shall be deductible for the computation of the taxable income of the trust. (similar to an Estate)
- The income distributed is subject to a 15% creditable withholding tax. Accordingly, B will receive P42,500 cash, net of the related withholding tax of P7, 500 (P50,000 * 15%). The amount to be included in B’s taxable income is still P50,000 with a tax credit of P7,500. (similar to an Estate)
- The Fiduciary is the one liable to file the income tax return for trusts held.
- Note that Estates and Trusts are no longer entitled to the P20,000 exemption.
Two or more Trusts: In the event that a Fiduciary holds two or more trusts from the same grantor with the same beneficiary, the income tax shall be consolidated for such trusts. Accordingly, the gross income and deductions are consolidated as if they are from one property.
INCOME TAX ON PARTNERSHIPS, JOINT VENTURES and CO-OWNERSHIPS
TAXABILITY OF PARTNERSHIPS AND PARTNERS:
KINDS OF PARTNERSHIPS
- General Professional Partnerships are formed by persons for sole purpose of exercising their common profession , no part of the income of which is derived from engaging in any trade or business.
- Taxable Partnerships are those formed by persons for purposes of profits.
A general professional partnership is exempt from income tax; while a taxable partnership is taxed similar to a corporation.
GENERAL PROFESSIONAL PARTNERSHIPS Sec. 26 of the Tax Code provides:
“Sec. 26. Tax Liability of Members of General Professional Partnerships. - a general professional partnership as such shall not be subject to the income tax imposed under Chapter III. Persons engaged in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities.
For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation.
Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.”
In relation thereto, Sec. 2.57(4) of RR No. 2-98, as amended, provides that GPPs are exempt from the Expanded Withholding Tax (EWT). However, Sec. 2.57(H) of the same Regulations provide that the income payments made periodically or at the end of the taxable year by a GPP to the partners, such as drawings, advances, sharings and allowances, stipends, etc. shall be subject to 15% EWT if the income payments to the partner for the current year exceeds P720,000; and 10%, if otherwise.
Every general professional partnership shall file, in duplicate, a return of its income, except income exempt under the Tax Code, setting forth the items of gross income and deductions and the names, TIN, Address and Shares of each partner.
ILLUSTRATION : Arthur, married to Guinevere, has two dependent minor brothers. He is a partner of a general professional partnership. He also has a trading business of his own. The following are data pertaining to taxable year 2016:
Gross Income, trading business P500, Expenses, trading business 100, Interest Income, Maybank 20, Salaries as part-time teacher, gross of withholding tax 100,
The general professional partnership had a gross income of P1,000,000 and expenses of P100,000. Arthur has a 1/3 share in the profits.
How much is Arthur’s Taxable Income?
Gross Income, trading business 500, Expenses, trading business (100,000) Salaries as part-time teacher, gross of withholding tax 100, Share in the Net Income of GPP: (1,000,000-100,000) x 1/ 300, Taxable Income 800,
NOTE:
- Net income or distributable net income of a General Professional Partnership (GPP) shall be computed in the same manner as that of a Corporation, as such, it may claim itemized deductions or optional standard deduction.
However, the partners’ distributive share from GPP income can no longer be subject to further deduction under RR No. 8-2018.
Note also, that individual partners are not allowed to claim the 8% Flat Tax Rate on their distributive share from the GPP since the same is already net of applicable deductions.
But, if the partner also derives other income from trade, business or practice of profession apart and distinct from the share in the net income of the GPP, the deduction that can be claimed from the other income would either be the itemized deductions or OSD.
- A GPP is exempt from tax, thus, the net income of P900,000 (P1M – P100,000) is already the distributable income to the partners, 1/3 (P300,000) of which is the share of Arthur.
- The share of a partner in a GPP’s net income shall be considered part of its taxable income subject to Income Tax in their individual capacities.
- The computation of the taxable income of a partner is just the same as in Taxation of Individuals with just the inclusion of the share in the net income of GPP.
- All other income, from trade, other business, rentals, etc. which are not subject to final tax or capital gains tax are considered part of the computation of taxable income of a partner (individual).
- The Final Tax rates applicable to individuals (for resident citizens, non-resident citizens, etc.) are also applicable to the partners.
- The computation of the Income Tax is also the same for individuals, and the graduated income tax table shall apply.
- Accordingly, Income Tax of Arthur would be P130,000, computed as follows:
First P400,000 30 , Excess over P500,000: (P800,000 – 500,000) * 25% 100, Total 130,
- The share of a partner in the net income of GPP is subject to 10% creditable withholding tax; or 15% if the gross income for the year exceeds P720,
- In the above illustration, the P300,000 share of Arthur in the income of GPP is subject to 10% withholding tax. If the withholding tax on the salaries as a part-time teacher amounted to P10,000, the income tax payable of Arthur would be computed as follows:
Asia Construction San Miguel Construction Joint Venture Gross Income P20,000,000 P30,000,000 P150,000, Expenses 5,000,000 10,000,000 50,000,
NOTE:
- In the above illustration, if all the requisites of RR No. 10-2012 are present, the Joint Venture shall be treated as tax-exempt and the taxability is similar to a GPP.
- Accordingly, the Net Income of P100M (P150,000,000 – 50,000,000) is exempt from tax and is therefore the distributable income to the joint venture parties.
- SMC and AC, sharing equally the profits, would receive P50M each.
- Since the joint venture is exempt from income tax, the share in the distributable income of SMC and AC shall form part of the parties to the joint venture’s computation of taxable income. Accordingly, taxable income of the companies are as follows: Asia Construction
San Miguel Construction Gross Income P20,000,000 P30,000, Share in the exempt Joint Venture
50,000,000 50,000,
Expenses (5,000,000) (10,000,000) Taxable Income 65,000,000 70,000,
- If, however, the joint venture entered into is for a purpose other than those which are exempt, then the joint venture shall be taxable as a corporation, and is therefore liable for P30M Income Tax ([P150M – 50M) *30%]
- The share of AC and SMC in the net income of the joint venture shall be based on the distributable income, after tax, that is, P70,000,000 (P100M taxable income less P30M tax), or P35M each.
- The share of AC and SMC from the income of the TAXABLE joint venture shall be treated as inter-corporate dividends, and is therefore exempt from income tax and final tax (see discussion of Final Tax under Tax on Corporations). Accordingly, it is not included in their separate taxable income, as computed below:
Asia Construction
San Miguel Construction Gross Income P20,000,000 P30,000, Share in the exempt Joint Venture - - Expenses (5,000,000) (10,000,000) Taxable Income 15,000,000 20,000,
- In the case however of individual co-venturers, the share in the net income of a taxable joint venture shall be subject to a 10% final tax, similar to that of dividends received by partners in a taxable partnership.
TAXABILITY OF CO-OWNERSHIPS
There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons. (Art. 484, Civil Code)
Taxability: Co -ownerships are generally not taxable because the activities of the co-owners are usually limited to the preservation of the property owned in common and collection of the income therefrom.
The income of the property owned in common is divided among the co-owners who shall then report in their respective income tax returns their shares of the income of the co-ownership.
When treated as a partnership: there must be unmistakable intention to form a partnership.
The mere sharing of gross returns does not in itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from the returns are divided. (Art. 1769[3], Civil Code)
However, when the income of the co-ownership is invested by the co-owners in business or other income producing properties, the co-ownership becomes taxable as a corporation because the co-owners have constituted a partnership.
Income TAX ON Estates Trusts Partnerships Joint Ventures AND CO- Ownership UST
Course: Accountancy (BSA2)
University: Quezon City University
