Private ruling: Partnerships
Published: August 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: The income year ended 30 June 2014

Ruling: Q1: Does the co-ownership structure entered into by A and B constitute a partnership under section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: If the Commissioner considers that the arrangement constitutes a partnership pursuant to section 995-1 of the ITAA 1997, are the individual partners, and not the partnership itself, the "holders" of the assets that are held in co-ownership under section 40-40 of the ITAA 1997 for the purposes of Division 40 of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: A and B enter into a co-ownership structure in respect of Assets that are used in a business (the Business). They will own the Assets as tenants-in-common. A has purchased a 50% interest in the Business. As part of the arrangement, A and B enter into other agreements which govern their conduct towards each other and towards certain third parties. A and B will both be entitled to income from the Assets. A and B state that their intention is to not be in a partnership. There is no course of conduct undertaken by A and B which displaces their intention to not be in partnership.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-40 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: A partnership is defined in section 995-1 of the ITAA 1997 as: (a) An association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or… The first limb of paragraph (a) of the definition of partnership refers to an association of persons (other than a company or a limited partnership) carrying on business as partners. This reflects the general law definition of a partnership. The second limb of paragraph (a) of the definition of partnership includes as a partnership an association of persons (other than a company or a limited partnership) in receipt of ordinary income or statutory income jointly. This type of partnership is commonly referred to as a tax law partnership. In this case, A and B are in receipt of ordinary income or statutory income jointly as they are both entitled to the income from the Assets that they co-own. Therefore, the two co-owners are an association of persons (other than a company or a limited partnership) that are in receipt of ordinary income or statutory income jointly. In accordance with Item 7 of the table in section 40-40 of the ITAA 1997, a depreciating asset that is a partnership asset is held by the partnership and not any particular partner. The meaning of the phrase 'partnership asset' is not defined for the purposes of Item 7. Paragraphs 1.45 and 1.46 of the Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001, which introduced section 40-40 of the ITAA 1997 states: 1.45 Property which has become partnership property or a partnership asset at general law is beneficially owned by all of the partners, even if only one partner is the legal owner. Where a depreciating asset is or becomes a partnership asset, it is appropriate to identify the partnership as being the economic owner of the asset. Thus, the partnership, and not any individual partner, is regarded as holding the asset. This is consistent with the structure of the income tax law, under which the partnership is a notional taxpayer arriving at a tax position which is then allocated out between the partners. [Schedule 1, item 1, section 40-40, item 7 in the table] 1.46 Whether a particular depreciating asset is a partnership asset is determined in accordance with partnership law. This is a question of fact that can only be determined from the terms of the partnership agreement and/or inferences drawn from the conduct of the partners towards the asset. The phrase 'partnership asset' used in Item 7 of section 40-40 of the ITAA 1997 is intended to carry its common law meaning. That is, it refers to assets of a partnership that are used for the purpose of the business carried on by the partnership. A general law partnership may hold depreciating assets whereas a tax law partnership cannot hold depreciating assets. It has been determined above that A and B are in a partnership for income tax purposes. In order to determine who the holder of the depreciating assets are, it is necessary to determine whether the co-ownership arrangement between A and B parties results in a general law partnership or if it is merely a tax law partnership. General Law Partnership A partnership at general law is a relationship which exists between persons carrying on a business in common with a view to profit (for example: see section 1 Partnership Act 1892 (NSW) ). The three essential elements of a partnership are: · Carrying on a business; · In common; and · With a view to profit. In this case, the co-owners are carrying on a business, that is, the Business. A has purchased a 50% interest in the Business. Further, the business is carried on with a view to profit, as A invests in, develops and operates this Business and other similar businesses. The last requirement is that the business is carried on in common. Taxation Ruling TR 94/8 (TR 94/8) states that there are no statutory rules in the income tax law for deciding whether persons are carrying on business as partners. The question of whether a partnership exists is one of fact. The essential element for a partnership to exist is the genuine intention of all the parties to act as partners. This intention must be demonstrated by the conduct of the parties. The existence of a partnership is evidenced by the actual conduct of the parties towards one another and with third parties during the course of carrying on the business. TR 94/8 sets out factors that will be considered in order to determine whether persons are carrying on business as partners in a given year of income. The factors include: · Mutual assent and intention of the parties; · Joint ownership of business assets; · Registration of business name; · Joint business account and the power to operate it; · Extent to which the parties are involved in the conduct of the business; · Extent of capital contributions; · Entitlement to a share of net profits; · Business records; and · Trading in joint names and public recognition of the partnership. The weight to be given to these factors varies with the individual circumstances. The above list of factors is not exhaustive and no single factor is decisive, although the entitlement to a share of net profits is essential. There are both factors that point towards and factors that point away from the two co-owners, A and B, being in a partnership at general law. Based on the facts provided and on a consideration of the factors above there is no general law partnership. Therefore, as there is no partnership at general law, the individual partners hold the assets themselves for the purposes of section 40-40 of the ITAA 1997.