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An Association of Persons

An Association of Persons (AOP) is treated as a separate tax entity, liable for tax independently from its members, and is considered a tax resident if its management is in Pakistan. Members' shares from the AOP are exempt from tax if the AOP has paid tax, but must be included for determining tax rates. The document outlines tax liabilities, apportionment of income among partners, and the implications of changes in the constitution or dissolution of the AOP.

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16 views11 pages

An Association of Persons

An Association of Persons (AOP) is treated as a separate tax entity, liable for tax independently from its members, and is considered a tax resident if its management is in Pakistan. Members' shares from the AOP are exempt from tax if the AOP has paid tax, but must be included for determining tax rates. The document outlines tax liabilities, apportionment of income among partners, and the implications of changes in the constitution or dissolution of the AOP.

Uploaded by

ranklinegta6
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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An association of persons is considered a separate entity from its members (partners).

Accordingly, the AOP is liable to tax separately from the members of the association.
 An AOP is treated as tax resident for a tax year if the control and management of its
affairs is situated wholly or partly in Pakistan at any time during that tax year.
 A resident AOP is taxable on its worldwide income.
 If the AOP has paid tax for a tax year, the amount received by a member of the
association in the capacity as member out of the income of the association shall be
exempt from tax. However, such share of member is included in income of the
member for determination of tax rate i.e. for rate purpose (discussed below in detail).
 If at least one of the members of an AOP is a company, the share of such company or
companies shall be excluded for the purpose of computing the total income of the
AOP and the company or companies shall be taxed separately at the rates applicable to
the companies, according to their share.
 The AOP is entitled to set off and carry forward its losses as per normal procedure.
However, share of loss from AOP is neither adjustable against the income of its
members nor it is considered for rate purpose.
 Where a change occurs in the constitution of a firm during a tax year, the firm’s income
is apportioned amongst the members on a time basis.
 The responsibility for filing the tax return of a firm for any tax year rests with the
persons who are members in the firm on the date the firm is required to file its tax
return.
 Where a firm dissolves or discontinues carrying on business, any tax payable by the
firm is recoverable from any person who was a member in the firm at the time of
dissolution or discontinuance of business. Tax payable can also be recovered from
legal heirs of the deceased partners.

any type of income paid to partner (salary, profit on debt and dividend. e.t.c)
is a disallowed expense for an AOP.
Individual as a member of AOP
If, for a tax year, an individual has taxable income besides exempt share of
profit from AOP, then the amount of tax payable on the taxable income of
the individual shall be computed in accordance with the following formula:
(A/B) x C
Where
A is the amount of tax that would be assessed to the individual for the year if
the amount or amounts exempt from tax (i.e. share of profit from AOP) were
chargeable to tax
B is the taxable income of the individual for the year if the amount or
amounts exempt from tax under (i.e. share of profit from AOP) were
chargeable to tax; and
C is the individual‘s actual taxable income for the year
Key points for solving AOP numerical
Following points should be kept in mind when solving AOP numerical:
 Any profit on debt, brokerage, commission, salary or other remuneration paid
by an association of persons to a member of the association is not allowed as
an expense; hence it should be added back to the taxable income of AOP.
 FBR has clarified that it is the profit before tax of AOP that will be included in
the taxable income of its members for rate purpose.
 Share of loss from AOP is neither adjustable against income of its members
nor it is considered for rate purpose.
 If an AOP has any income that falls under final tax regime (FTR) then
members share from such income shall not be added in the taxable income of
the member. Section 4(4) read with Section 169(2) clearly states that income
falling under FTR is not to be included in any taxable income.
 If AOP has any exempt income, the share received in the capacity as member
out of the income of association shall remain exempt.
Tax rates for non-salaried Individuals and Association of Persons
Sr. No. Taxable Income (Rs.) Rate of Tax
1 Where the taxable income does not exceed 0%
Rs.600,000
2 Where the taxable income exceeds Rs.600,000 15% of the amount exceeding
but does not exceed Rs.1,200,000 Rs.600,000

3 Where taxable income exceeds Rs.1,200,000 Rs.90,000 plus 20% of the


but does not exceed Rs.1,600,000 amount exceeding Rs.1,200,000

4 Where taxable income exceeds Rs.1,600,000 Rs.170,000 plus 30% of the


but does not exceed Rs.3,200,000 amount exceeding Rs.1,600,000
5 Where taxable income exceeds Rs.3,200,000 Rs.650,000 plus 40% of the
but does not exceed Rs.5,600,000 amount exceeding Rs.3,200,000
6 Where taxable income exceeds Rs.5,600,000 Rs.1,610,000 plus 45% of the
amount exceeding Rs.5,600,000
Mr. Rizwan and Mr. Wajahat are two lawyers and working together as a firm in the
name and style of “Rizwan Wajahat Associates”. During the year, the firm has earned
aggregate profit of Rs. 300,000. The aforesaid profit includes following deductions:
Salaries to Partners
Mr. Rizwan Rs. 100,000
Mr. Wajahat Rs. 150,000

Expenses on which tax has not been deducted Rs. 40,000


Payments of rent exceeding Rs. 50,000 [made otherwise than crossed cheques]
Rs.60,000
Profit on debt to Rizwan Rs. 70,000
Both partners have equal sharing in the firm. Mr. Rizwan has no other income. Mr.
Wajahat is also running a business of printing and advertising services. He earned
income of Rs. 800,000 from the said business.
Determine the tax liability of the firm, and its members for the tax year 2023.
Tax liability of the Firm
For the Tax Year 2024

Profit as per accounts 300,000


Add inadmissible expenses
Partners salary 250,000
Profit on debt 70,000
Payments otherwise than banking channel -
Expenses on which tax not deducted 40,000
Profit before tax 660,000
Tax 60,000 X 7.5% 4,500
Profit after tax 655,500
Distribution of taxable income among partners

Particulars Mr. Rizwan Mr. Wajahat Total


Salaries paid to partner. 100,000 150,000 250,000
Profit on debt 70,000 - 70,000
Balance share of profit before tax 170,000 170,000 340,000
Income from AOP in the hands of partners 340,000 320,000 660,000
This income will be included in the taxable income of its members for rate purpose.
first their common share is calculated (here it is 340,000), this
share is apportioned and then those specific incomes (here like
profit on debt given to one specific partner) is added to that
apportion income this will be there total share of profit.
Income from printing and advertising 800,000
Add Share from AOP- Exempt but included for rate purposes 320,000
Taxable income 1,120,000
Tax on taxable income 520,000 X 15% 104,000
Tax credit for share of AOP (29,714)
104,000/ 1,120,000 X 320,000

Tax payable 74,286

2 Where the taxable income exceeds 15% of the amount


Rs.600,000 but does not exceed exceeding Rs.600,000
Rs.1,200,000
Change in constitution of an AOP (Section 98A)
Where a change occurs in the constitution of a firm during a tax year, the firm’s income is
apportioned for rate purposes amongst the partners on a time basis (Sec-98A). The
responsibility for filing the tax return in this case rests with the persons who are partners
in the firm on the date the firm is required to file its tax return.
Discontinuance of business or dissolution of an AOP (Section 98B)
Where an AOP dissolves or discontinues carrying on business, any tax payable by the firm
is recoverable from any person who was a partner in the firm at the time of dissolution or
discontinuance of business. Tax payable can also be recovered from legal heirs of the
deceased partners.
Succession to business otherwise than on death (Section 98C)
Where a person carrying on any business or profession has been succeeded in any tax year
by any other person (hereafter in this section referred to as the “predecessor” and
“successor” respectively), otherwise than on the death of the predecessor, and the
successor continues to carry on that business or profession:
(a)the predecessor shall be liable to pay tax in respect of the income of the tax year in which
the succession took place upto the date of succession and of the tax year or years
preceding that year; and
(b) the successor shall be liable to pay tax in respect of the income of such tax year after the
date of succession.
Notwithstanding anything mentioned above, where the predecessor cannot be found, the
tax liability in respect of the tax year in which the succession took place upto the date of
succession and of the tax year or years preceding that year shall be that of the successor in
like manner and to the same extent as it would have been that of the predecessor, and all
the provisions of this Ordinance shall, so far as may be, apply accordingly.
Where any tax payable under this section in respect of such business or profession cannot be
recovered from the predecessor, it shall be recoverable from the successor, who shall be
entitled to recover it from the predecessor.

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