Private ruling: Partnership income
Published: July 2013
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is 50% of the net income of the partnership business assessable to you under when you did not receive any of the proceeds? | A1: Yes | Q2: Are you liable to remit 50% of the Goods and Services Tax (GST) owed by the partnership in relation to the sale of trading stock when all proceeds including the GST were awarded to your ex-spouse as part of the property settlement? | A2: Yes | Q3: Are you assessable on 50% of the interest on funds received from the sale proceeds of partnership stock, when the interest was awarded to your ex-spouse as part of the property settlement? | A3: Yes

Relevant facts and circumstances: A partnership business was operated by you and your spouse for several years. No formal partnership agreement exists but in previous years the partnership profits and losses were distributed equally. You and your spouse separated and you did not have any further contact with your ex-spouse. From separation you used your own personal bank accounts to pay some partnership expenses and credit income. The joint account had a number of small transactions after separation, when it was closed. You have kept your own records of income and expenditure but you are unaware of what records your ex-spouse has kept. The majority of stock was sold under the partnership's ABN. The GST-exclusive stock proceeds were listed in the court order. Pursuant to the court ordered settlement the proceeds from the sale of the stock held in trust were awarded to your ex-spouse (excluding the GST amount) and interest the funds earned whilst in trust.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 92(1)

Reasons for decision: Summary: You will be assessable on 50% of the partnership profit and the interest earned whilst the funds were held in trust in your individual tax return. You will also be liable for 50% of the GST liability relating to the sale of partnership stock. | Detailed Reasoning - Detailed reasoning: Subsection 92(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that the assessable income of a partner in a partnership includes the partner's share of the net income of the partnership. Each partner's individual share or interest in the 'net income' or 'partnership loss' of the partnership, as determined in accordance with section 90 of the ITAA 1936, is included in the assessable income or allowable deductions of the partner. As the full High Court observed in Rose v. Federal Commissioner of Taxation (1951) 84 CLR 118; (1951) 9 ATD 334: Division 5 of Part III, which deals with partnerships, is based upon the view that the collective income earned by the partnership belongs according to their shares to the partners regardless of its liberation from the funds of the partnership, that is, its actual distribution. As Fisher J stated in Federal Commissioner of Taxation v. Everett 78 ATC 4595 at 4618; (1978) 9 ATR 211; (1978) 38 FLR 26: a taxpayer partner ... derives assessable income upon the ascertainment of the net income of the partnership for the year of income. Where a partnership is determined, the rights of a partner to share in the profits accrue to him or her at the time of that determination, and that share of the profits must be treated as then having fallen into his or her hands whether or not they actually fall into the hands of specific partners ( Case U96 87 ATC 581; (1987) 18 ATR 3562). Similarly, in Case 7/2000 2000 ATC 168; [1999] AATA 1025; (1999) 44 ATR 1131, it was found that the fact that the taxpayer did not obtain her full distribution from a partnership of which she was a member did not mean she was not assessable on it. A private arrangement between the taxpayer and his spouse as to the sharing of profits and losses does not alter or over-ride their respective entitlements for income tax purposes (Taxation Ruling TR 93/32) Taxation Ruling TR 94/8 outlines the factors in deciding whether persons are carrying on business as partners in a given year of income. The relevant factors to consider are: | Detailed Reasoning - Intention: This covers the mutual assent and intention of the parties. | Detailed Reasoning - Conduct: (a) joint ownership of business assets (b) registration of business name (c) joint business account and power to operate it (d) extent to which parties are involved in the conduct of the business (e) extent of capital contributions (f) entitlement to a share of net profits (g) business records (h) trading in joint names and public recognition of the partnership. Although you have not taken an active role in the partnership business from the point of separation, there is no evidence that the sale of the stock was anything other than proceeds from the partnership business that you had carried on. Partners share the profits and losses of the partnership activity. An examination of your individual taxation returns lodged to date shows that you received distributions on a 50/50 basis of the net profits generated by the partnership. This is evidence of an intention to share profits in line with some form of partnership agreement and is prima facie evidence of the existence of a partnership. The maintenance of business records in the name of the parties or in the name of the partnership, rather than in the name of one party only, is indicative of the existence of a partnership. The conclusion that a partnership exists is supported if the parties, by trading in joint names, make it clear to persons dealing with them that they are in partnership. The payer and the trustee of the funds from the proceeds of the stock demonstrated the recognition of a partnership. Also the Court included in its orders an order to finalise the partnership. Therefore, you will be assessable on your 50 percent share in proceeds from the partnership stock and liable for the attached GST, regardless of the fact that the Court ordered that the proceeds of the stock be awarded to your ex-spouse. As the interest income relates to the partnership proceeds, the interest income will be treated in the same way. There is no discretion in the law on this matter.