ATO ID 2004/955: Partnership income and non-cash business benefit
Date of decision: 12 November 2004
Year of income: Year ended 30 June 2005
Business line: Private Groups and High Wealth Individuals

Issue
Does section 21A of the Income Tax Assessment Act 1936 (ITAA 1936) apply in the calculation of the net income of a partnership in relation to the provision of the exclusive use of plant and equipment to the partnership, at no charge, by the respective partners?

Decision
No. Section 21A of the ITAA 1936 does not apply in the calculation of the net income of the partnership as the provision of the exclusive use of plant and equipment by the partners does not constitute a non-cash business benefit.

Facts
A and B carry on separate businesses. They have entered into a partnership arrangement for the purpose of sharing the use of plant and equipment which is owned by the businesses as tenants in common. Under the arrangement, the two partners retain ownership of the plant and equipment as tenants in common and allow the partnership the exclusive right to use the plant and equipment at no cost. The partnership will use the plant and equipment to provide certain services to the two partners to be used in their respective businesses. The two partners will be charged for the provision of those services by the partnership, based on an equal share of the costs incurred by the partnership in providing the services.

Reasons for decision
Summary: Section 21A of the ITAA 1936 provides that any non-cash business benefit is to be treated as convertible to cash for the purpose of determining the income of a taxpayer from the carrying on of a business. Non-cash business benefit is defined in subsection 21A(5) to include property and services provided in respect of a business relationship. Section 21A of the ITAA 1936 does not actually deem any benefit in the form of property or services to be income. Its effect is that in the event that the non-cash benefit is already considered to be income derived in carrying on a business, subsection 21A(2) specifies that the amount to be brought to account is the amount that the taxpayer would have paid the provider for the property or services under an arm's length transaction. For income tax purposes, a partnership is not a separate legal entity distinct from the partners forming the partnership. A partnership does not pay tax on its net income but is required to furnish a return of the income of the partnership. The partners are then taxable under section 92 of the ITAA 1936 on their individual shares of the net income of the partnership, whether distributed to them or not. Whilst there is a provision of services, being the right to exclusive use of the plant and equipment, by the partners to the partnership, this does not automatically constitute an assessable non-cash business benefit in the hands of the partnership. The benefit is assessable only if it has the character of income derived by the partnership from the carrying on of a business and is provided in the context of a business relationship. The provision of the exclusive use of the plant and equipment to the partnership to enable it to commence providing services to the partners does not have the character of income according to ordinary concepts. The provision of the exclusive use of the plant and equipment is a capital contribution by the partners for the purpose of establishing the partnership business structure. Accordingly, section 21A of the ITAA 1936 does not apply in the calculation of the net income of the partnership.

Legislative references: Income Tax Assessment Act 1936 section 21A subsection 21A (2) subsection 21A (5) section 92
Related public rulings and determinations: Taxation Ruling IT 2631 | Taxation Ruling TR 93/38
Subject references: Income Tax Non cash business benefits Partnerships